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Construct a mental model for cost optimization.


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The mental model for cost optimization emphasizes the benefits of economies of scale, economies of scope and economies of cost. Economies of scale involve spreading fixed costs over a larger volume of output, to reduce unit costs. Economies of scope focus on creating efficiency by taking advantage of the similarities between different functions or activities. Economies of cost focus on reducing unit costs over time by taking advantage of better methods or by increasing input efficiency. By considering all three aspects, firms can ensure their costs are optimized.